Rabu, 22 Desember 2010

In the Globalization and Free Market Era, Is the Protection of Local Industries Still Applicable?

By: Gamil Abdullah*. An article in PETROMINER No. 12/December 2010, p. 60-61.

Local Content was made as main topic in Petrominer No. 11 of November 2010 edition. The preference of local content in fact constitutes one of the forms of protecting local industry. Have the various protective policies applied so far reached the target? And, amid the strong current of globalization and pressures from the free market, are protective policies still relevant to be applied?

Protection of local industry at least is to be applied using one or a combination of two methods, namely: (i) Tariff barrier – imposition of import duty and tax in the framework against imported products, and (ii) Non tariff barrier – quota limitation up to prohibition against imported products.

Based on data of procuring goods and services to support upstream oil & gas, the percentage of local content con-tinues to show escalations year by year. Various sources say that local content in procuring the upstream oil & gas in 2010 up to the third quarter has reached over 60 percent in the aggregate. Is it enough only through a parameter of local content—that constitutes an implementation of the downstream industrial system—to show that Indonesia has been successful in its industry?

In actual fact, it is not enough to judge whether a country is successful in its industry just by observing the level of local content, however, its resources must also be observed, namely who and whose resources activate the local industry. So, it is more than a mere ‘local content’ is ‘Indonesian content’. If in an industry the portion of ‘Indonesian content’ is increasingly rising, it means a success in industry. Conversely, if ‘Indonesian content’ is increasingly declining—not to mention an industry sold to a foreign party—this is a set back, no matter how high is the local content.

Industrial Protection and ‘Infant Industry Argument’

Industrialization in developing countries, especially manufacturing industry, in general are practicing import substitution strategy, i.e. a series of businesses that try to produce various commodities that were previously imported by shifting the demand for imports to production sources and offers from within the country.

The stage of implementing the first strategy usually is imposing tariff barrier or quota against certain imported products. Subsequently, it is followed by developing domestic industry to produce goods that are usually imported. It is commonly carried out through cooperation with foreign companies that have the urge to build industries in a certain region and their business units in the country concerned, shielded by the protective wall in the form of tariff. In addition, they are also given incentives, such as tax relief, various facilities and other investment stimulus.

Given the tariff, basically consumers subsidize domestic producers through a higher price. But, in the long run the promoter of protection of infant industry in developing countries said it will benefit the respective parties once the local producers reached their economic scale and able to carry out efficiency. Domestic products subsequently will be able to serve domestic as well as world market. Once this is achieved, all parties, namely consumers, producers and their employees will gain benefit, tariff will be abolished and the government will receive income tax from domestic producers that have been settled as a substitute for the abolished import duty.

Eventually, as in South Korea, Taiwan and China, whose domestic producers are not only able to meet the need of domestic markets without tariff but also exported. They could do this because they have been able to produce said products with a cheap cost structure so that the prices they offer are very competitive and could compete in overseas market places.

Thus, the aim of a long-term strategy of protective policy, according to infant industry argument, is for the country’s industry to become self-reliant, strengthening indigenous capabilities and able to free themselves from dependency on imported resources.

The national economy has various problems in its relation with the sector of industry and trading:
  • Indonesia’s industry is highly dependent on imported technology sources particularly from industrially developed countries. The high dependency on technology import constitutes one of the hidden factors simultaneously becomes the principal cause of failure of the various industrial and economic systems in Indonesia. The dependency on technology import also, whether it is being realized or not, constitutes one of the causes that makes Indonesia to be continuously dependent on foreign debts.

  • Intrinsically, either on national or international level, Indonesia’s industrial system has no self-reliant responsive and adaptive capability. Therefore, it is very weak in anticipating change and is unable to take preventive measures to face said change.

  • Indonesia’s economic activities are highly dependent on the flow of foreign capital into the country and the amount of foreign exchange accumulated through trading and offshore loans.

  • The composition of Indonesia’s export commodities in general is not a competitive advantage type, but due to comparative advantages in relation to (i) the availability of natural resources; and (ii) the availability of cheap workforce.

  • The primary commodity that constitutes Indonesia’s mainstay for export in general is in the form of raw material based on natural resources of little added value.

  • Domestic industrialists have not positioned science & technology as an urgent thing in building competitive superiority. It can be observed from the weak R&D and the low level of ‘industrialization of intelligence’.

  • The absence of policy implementation that could drive industrialists to develop their industries toward the process of upstream production.
Observers agree that the application of import substitution of industrialization strategy in a number of developing countries shows success. However, several negative impacts surfaced, among others:
  • Companies engaged in sectors that are protected — either state-owned or private — apparently misused every protection and facilities provided by the government. Since they feel comfortable shaded under protective tariff that freed them from the pressures of competition, they are lulled and that their modes of business operations become inefficient and have no competitive power.

  • The principal party that gains profit from the process of import substitution are foreign companies that act as principal as supplier of raw material, technology, finance and other resources.

The upstream sector of oil & gas is consistent in implementing the protective regulations. At the time of evaluating the offered price, we should include the value of local content in the evaluation. To import goods, we should put forward what is called the master list. The two issues I mention are none other than a form of protection of non tariff barrier. But, in return, we certainly wish for national industry to be able to provide added value as maximal as possible to the nation.

National industry must be strong, self reliant and sustainable business undertaking. To this end, (i) the policy of the government (regulator) and support from various stakeholders are needed so that domestic industry is able to develop production facilities from upstream to downstream and, (ii) ownership of resources that activate industry (technology, finance, capital and human resources) as maximum as possible is controlled by Indonesians. Thus, the primary aim of national industrial development, namely to create self reliant and industrial sustainability, could materialize.

The question is, in the midst of the strong current of globalization and pressures from the free market, is protective policy still relevant? Joseph E. Stiglitz (economist from the Massachusetts Institute of Technology; Nobel Prize winner for Economy 2001 known as critic of international institutions IMF the World Bank and WTO as the extended hand of developed countries—the USA in particular) suggested developing countries to be firm against the IMF and World Bank. And also they should know what is needed by the majority of the people who live in poverty. He mentioned that the United States of America that supports globalization and free market apparently remains applying protection on its agricultural and industrial sectors, thereby applying double standard in the international forum. Therefore, developing countries should also have the right to effect protection on a number of their products.

In the case of Indonesia, who is fighting corruption, poverty and unemployment, Stiglitz reminded us that the power of free market often disadvantage the large segments of weak (poor) communities, therefore the government must make tangible efforts to protect its people. The weaker the moral commitment of the leaders of the governance of developing countries, the more they will be tossed about by the economic interest of developed countries. (*)

Disclaimer: This article is the writer’s sole opinion. Not intended to reflect any opinion or policy of the agency where the writer works for.

*) Oil & Gas Observer.

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